Recently, the Supreme Court of India (“Supreme Court”), in M/s N. G. Projects Limited v. M/s Vinod Kumar Jain, has observed that High Courts under Article 226 of the Constitution of India (“Constitution”) should not interfere with the grant of tender even when a party has been excluded from the tender process arbitrarily. This case comment argues that not only is this judgement against the position of law governing the same, but this judgement may set a dangerous precedent for the future.
Introduction and Factual Background
The State of Jharkhand (“State/tender inviting authority”) had invited a tender (“first tender”) on 7th June 2019 for the reconstruction of Nagaruntari – Dhurki – Ambakhoriya Road (“the project”). Vinod Kumar Jain (“Respondent”) had participated in this tender. However, the State cancelled the first tender and accordingly, a second tender was issued for the project. The Respondent had participated in the second tender as well.
Out of the 15 bids that were received for the second tender, 13 bids, including that of the Respondent, were found to be “non-responsive” as per the Standard Bidding Document (“SBD”). The reason for the same was, inter alia, that the bank guarantee submitted by the Respondent was not as per the format provided under the SBD. Further, the bank guarantee was valid from 8th July 2019, but the second tender was issued on 20th August 2019 only.
The bid of N. G. Projects Limited (“Appellant”) was found to be substantially responsive and in view of the same, the Appellant was awarded the tender. Thereafter, a work contract was also executed in favour of the Appellant on 3rd October 2019. The Appellant commenced its work and completed 21.9 kms of earth work out of 24 kms. Further, the Appellant also completed work amounting to Rs. 8,50,00,000/- (approx.).
In view of the same, the Respondent filed a Writ Petition under Article 226 of the Constitution before the High Court of Jharkhand (“High Court”).
Proceedings before the High Court
By an order dated 14th January 2020, the Single Judge of the High Court set aside the decision of awarding the tender to the Appellant and directed the State to issue a fresh tender for the project. The Appellant preferred an appeal against the order dated 14th January 2020 before the Division Bench of the High Court. However, the appeal was dismissed by the Division Bench. Hence, the Appellant has approached the Supreme Court in the present proceedings.
Issue and Proceedings before the Supreme Court
The sole issue before the Supreme Court was whether the Single Judge and the Division Bench of the High Court (collectively to be referred as “High Court”) have rightly interfered with the tender awarded to the Appellant?
At the outset, the Supreme Court observed that the High Court has erred in interfering with the grant of tender to the Appellant.
Placing reliance on Tata Cellular v. Union of India (“Tata Cellular”) the Supreme Court observed that under Article 226 of the Constitution, a High Court cannot act as an appellate court and substitute its own decision with that of the tender inviting authority. Courts can only review “the manner in which the decision was made”. Thus, the Supreme Court reiterated that although judicial review is permissible to check the exercise of contractual powers by the Government for preventing arbitrariness etc., the power of judicial review in such cases comes with certain limitations. Therefore, the grounds on which the courts must exercise the power of judicial review in such cases are:
- unreasonable (Wednesbury principle) and
- procedural impropriety.
The Supreme Court also relied on Afcons Infrastructure Limited v. Nagpur Metro Rail Corporation Limited to observe that the State, being the author of the tender, “is the best person to understand and appreciate” the requirements of the tender.
The Supreme Court noted that in the instant case when the first tender was cancelled and the second tender was invited, the Respondent was under an obligation to submit a new bank guarantee in the format prescribed under the second tender. However, the Respondent used the same bank guarantee that it had submitted in the first tender but “with a letter from the bank indicating that there is now an amendment with regard to the dates and the contract therein”.
Therefore, the submitted bank guarantee in the second tender was substantially different from what was required. In the opinion of the Supreme Court, if such an exercise is allowed to be carried out, then there would be a huge burden on the tender inviting authority to make sure that every submitted bank guarantee is valid and that the amendment letter by the Bank is validly executed. In the present case, the State had in fact attempted to contact the Respondent’s Bank and verify the amendment letter but there was no reply from the Respondent’s Bank.
Placing reliance on Section 41(ha) of the Specific Relief Act, 1963 (“Specific Relief Act”), the Supreme Court held that as construction of roads forms a part of infrastructure projects, the High Court should not have stayed its construction under Article 226 of the Constitution. In tender matters, the authority inviting the bids is the ultimate decision – making authority and it is permissible for them to arrive at different conclusions on the same set of facts. However, the decision of the tender inviting authority cannot be mala fide or be determined by extraneous conditions, which as per the Supreme Court is not the case in the present proceedings.
The Supreme Court was also of the opinion that courts do not have the expertise to examine the intricacies of the State’s economic activities and this factor should be kept in mind while exercising jurisdiction under Article 226 of the Constitution. Rather, the courts must limit their examination to whether the decision of the tender inviting authority was in compliance of the procedure contemplated in the conditions of the tender.
Interestingly, the Supreme Court also held that under Article 226 of the Constitution, even when the court finds that the decision of the tender inviting authority is arbitrary or mala fide, even then the courts must direct the aggrieved party “to seek damages for the wrongful exclusion rather than to injunct the execution of the contract”. This is so because interference in such matters leads to additional costs for the State, and it is also contrary to public interest.
In the present case, the Appellant has already received a payment of Rs. 3,98,52,396/- from the State. Further, the Appellant has also submitted bills worth Rs. 8,50,00,000/- (approx.) to the State for the work done. Therefore, the Supreme Court held that the termination of the work contract awarded to the Appellant would cause financial burden on the State and cause a delay in the completion of the road project. Thus, the State was directed to allow the Appellant to continue with the project and order of the High Court was set aside.
The Supreme Court also noted that in such contracts, “there should not be any interim order derailing the entire process of the services meant for larger public good”. It was observed that the Single Judge’s order granting an interim injunction in the present case has not helped anyone but only the Respondent and the same has also caused a delay in the completion of the project.
The Supreme Court concluded with a suggestion that since multiple layers of jurisdiction cause delay in the final adjudication of disputes where the grant of tenders is challenged, such disputes can be directly placed before the Division Bench of the High Courts and not before the Single Judge.
At the outset, the author submits that the decision of the Supreme Court in the given facts and circumstances of the case cannot be doubted. As the bank guarantee was not submitted in the format as required, the Respondent was not entitled to be granted the tender. Additionally, when the State attempted to contact the Respondent’s Bank to verify the bank guarantee, the Bank also failed to respond. Therefore, the appeal of the Appellant was rightly allowed by the Supreme Court. However, it must be said that the Supreme Court in the present case has made certain observations which are contrary to the law laid down by it in Tata Cellular.
Has Tata Cellular been narrowed down?
It is a well – settled principle of law that under Article 226 of the Constitution, an aggrieved party can challenge the decision of the tender inviting authority on limited grounds, such as arbitrariness and mala fide. Therefore, in the present case, the Supreme Court should not have held that in cases where the tender has been granted in an arbitrary or a mala fide manner, even then the courts must “refrain from interfering in the grant of tender but instead relegate the parties to seek damages for the wrongful exclusion rather than to injunct the execution of the contract”. In fact, in Tata Cellular, the Supreme Court had observed that although a Court does not sit in appeal over a decision made by the tender authority, however, such a “decision must not only be tested by the application of Wednesbury principle of reasonableness…but must be free from arbitrariness not affected by bias or actuated by mala fides”.
Further, there are two limitations of the approach as adopted by the Supreme Court in this case. Firstly, it will be extremely difficult to compute or assess damages where a party has been wrongfully excluded from a tender. Construction projects awarded through a tender are usually those which have a national and/or commercial significance. Thus, these projects involve a lot of investment and take years to complete. In such a scenario, it will be extremely hard to calculate damages which an aggrieved/wrongfully excluded party would be entitled to. Secondly, it will be unfair to the party which has been wrongfully excluded from a tender to fight a court battle for claiming damages.
In the author’s opinion, granting interim injunctions in such cases would ensure that before any substantial work gets completed, the High Courts can first decide the legality of the tender which has been awarded. Section 41(ha) of the Specific Relief Act also does not stipulate that an injunction cannot be granted when the tender inviting authority has acted arbitrarily.
Therefore, where the material on record suggests that the awarding of the tender has been vitiated by mala fide or arbitrariness, the High Courts must stay the execution of the project till final adjudication. As this might stall the project in question, the Supreme Court has rightly suggested in the present case that disputes pertaining to tender can be directly listed before the Division Bench. Further, the Parliament/Judiciary can contemplate a time limit within which disputes pertaining to grant of tender must be decided.
Projects in Public Interest
Just because a project might have national importance or is in the public interest, the tender inviting authority must not be permitted to get away with an arbitrary or mala fide action.
The author respectfully submits that when it comes to projects having national/public importance, the law must strictly prevent arbitrary or mala fide actions of the State and ensure that only the rightful party gets awarded. This is simply because these projects mostly become the showpiece of a nation’s economy and highlight the development of a country. Awarding such contracts to non – deserving parties would thus be a step in the wrong direction. For example, construction of a highway connecting multiple states would undoubtedly have national and public importance. In such cases, it is extremely important that the awarding of tender is not vitiated by mala fide or bias. This is so because if such projects are not completed on time or are poorly executed, the country’s economy suffers.
It is not as if the jurisdiction under Article 226 of the Constitution is extremely wide. In Tata Cellular, the Supreme Court had observed that under Article 226, a “court does not sit as a court of appeal but merely reviews the manner in which the decision was made”. Therefore, where the tender has been awarded arbitrarily, an aggrieved party must be allowed to take recourse to Article 226 and challenge the grant of tender. The High Courts can always impose exemplary costs to ensure that only genuinely aggrieved parties approach them under Article 226 to challenge a tender process/award.
Dangerous Precedent for Future
Interestingly, the judgement in Tata Cellular has been passed by a higher bench (3 – Judges), whereas the present judgement is by a bench of 2 – Judges. However, parties which get awarded tenders in future due to arbitrary or mala fide actions of the State will rely on this judgement. In fact, one such instance recently took place.
In Jai Bholenath Construction v. The Chief Executive Officer (“Jai Bholenath”), the Bombay High Court, relying on the instant judgement, had upheld the eligibility of a party to the tender process even though the said party was “declared eligible in a flagrant violation of principles of natural justice and all fairness in the process of determining the eligibility of the tenderers”. Setting aside the order of the Bombay High Court, the Supreme Court observed that the Bombay High Court had totally misread the instant judgement. Interestingly, the judgement in this case has been passed by the same Bench which decided Jai Bholenath.
As explained in the last section, the judgement of the Supreme Court in the instant case is not only in disregard of Tata Cellular, a judgement of a higher bench, but it might also set a dangerous precedent for the future. The author respectfully submits that in light of the law laid down in Tata Cellular and a catena of judgements, the observations of the Supreme Court in the instant case are in the wrong direction. It will be interesting to see if there are any future developments on this point of law.
Raghav Bhatia is a graduate of the Jindal Global Law School, JGU and an Advocate practicing before the Supreme Court of India.
Categories: Constitutional Law, Corporate Law, Legislation and Government Policy